Pension Isa could see savings slashed by a sixth, says Association of British Insurers, which favours the flat rate of tax relief instead

Hayley Kirton covered law, professional services and banking at City A.M.

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Hayley Kirton

Annual savings to pensions could tumble by £383 on average under an Isa system (Source: Getty)

Introducing a pension Isa could lower contributions by around a sixth, the Association of British Insurers (ABI) has warned today.

Using research prepared by the National Institute of Economic and Social Research (NIESR), the ABI has calculated that a pension Isa system, where pensions contributions are taxed but withdrawals are exempt, would influence people to cut their annual savings by £383 on average, even if government offered to add 30 per cent up front to the amount contributed.

A study commissioned by the ABI and conducted by the Pensions Policy Institute discovered that such a scheme would also create a deficit of at least £5bn a year.

"The pension Isa would hit today’s savers and could create a fiscal time bomb for future generations," cautioned Yvonne Braun, director of long term savings at the ABI. "Many savers would be worse off and it would also damage the economy more widely because of its impact on saving and investment."